Market Talk

Late buying lifts US stocks modestly in a very quiet session, as the stock rally continues apace, while the Treasury market continues it recent sell-off, amid what seems to be a universal opinion that the US economy is getting better.

DJIA adds 40 to 11410, S&P 500 rises 7 to 1240, the latter up about 1.3% on the week. Technically, too, the week was a break-out for the S&P. Nasdaq Comp gains 21 to 2638, about a three-year high. NYSE volume, at more than 4B shares traded, actually is pretty good for a Friday during the holidays.

Ten-year yield, meanwhile, rises to 3.32%, near a six-month high. The general take on the Treasury sell-off is that it signals an improving economy; nobody’s very worried about an attack of the bond vigilantes. But if the economy’s so hot, why’s unemployment still so high? Everybody, and we mean everybody, is writing off last week’s jobs report as an outlier, a mistake even. It’ll get revised higher, we’re told.

Look, it may get revised higher. But it’s not going to get revised to 350,000 from 39,000. The front page of the Wall Street Journal said it all today: companies are sitting on their cash; they are not hiring. How’s that plug into your 2011 worldview?

It’s amazing how much all the big, honking risks in the world are being ignored by the markets, too. Europe, China, the US, nobody’s worried. But all three regions have issues worth worrying about. “The fiscal and sovereign credit problems in Europe are not going away,” Gluskin Sheff’s David Rosenberg wrote in his daily commentary. “Neither is the instability in the US state and local government sector. Policy tightening in China is also a source of uncertainty. Volatility is likely to intensify with this outlook.”

Everybody is writing off risk. That in itself is a screaming red flag, you ask me.

How easy was that?

The hotly anticipated results of the European bank stress tests were released at noon Eastern time. Ninety-one banks were tested, apparently tested very gingerly, and 84 of them came through unscathed. One Greek bank, one German bank, and five Spanish banks. That’s it. Only seven banks on the entire European continent were found wanting.

How credible does that sound?

Let’s be frank: there is no way, no way, these tests were designed to rigorously test the strength of the European banking system. Like their American counterparts, the tests were rigged exercise designed to shore up public confidence. The truth never entered into the calculations, and why should it? Everybody already knows the truth. American banks failed a very real stress test in the fall of 2008, when the government had to come in and save the entire industry. European banks similarly failed their very real stress test this past spring.

First off, the European tests ignored the biggest risk out there, the one that really started this whole downward spiral: a sovereign default. If reality interests you at all, you can stop right there, because if the events of 2010 made one thing clear, it’s that Europe’s banks, on the whole, absolutely were not prepared to suffer through a sovereign default.

Credible or not, these tests will probably go a long way toward fulfilling their real goal: restoring confidence among the populace. It’s amazing to me that last year’s stress tests here get as much credit as they do. I don’t think the tests themselves did anything at all. What would have happened if the feds conducted the stress tests, and did nothing else to rescue the banking system?

If European leaders hadn’t cobbled together that nearly $1 trillion bailout fund, you think anybody’d care about these stress tests? Of course not.

“Regardless of what the stress tests say about a given bank, the real factor driving the willingness of credit markets to do business with a bank in London or Paris is the condition of the government and the probability that the government will support the bank,” Chris Whalen of Institutional Risk Analytics wrote.

- John Hussman writes about a subset of market conditions that have historically been associated with sharply negative implications for stocks. “The combination of unfavorable valuations and collapsing market internals is a sharp warning to examine risk exposures carefully here,” he says.

- Job prospects are showing signs of life for college graduates. But make no mistake, they the labor market is far from thriving.

- European banks not for the faint-hearted investors. “It makes more sense to simply bypass these stocks until the story is over unless you are more of a trader or don’t mind very big swings,” writes Roger Nusbaum. The consequence for being wrong is greater with these banks. Obviously this will be too conservative for some folks but ultimately this is a know thyself question.”

- Facebook CEO Mark Zuckerberg addresses new privacy settings in a Washington Post op-ed, hoping to quell privacy concerns. But his memo seems like a “classic non-apology,” MediaMemo blogger Peter Kafka says. “He’s sorry that Facebook ‘move[d] too fast.’ That’s the kind of thing you say in a job interview if someone’s lazy enough to ask you to describe your biggest weakness — ‘Sometimes I try too hard.’”

- The fact that current and former AIG executives won’t face criminal charges seems baffling. But “if you rope your advisors like your accounting firm into signing off on your stupid or possibly even criminal behavior, then you get off scot-free,” Yves Smith writes at naked capitalism.

- Existing home sales increased more than expected, but keep an eye on inventory levels, Bill McBride notes at Calculated Risk. Inventory rose to 4.04M in April from 3.63M in March. It’s also an increase from April 2009, breaking a string of 20 consecutive months of y/y declines in inventory. “The increase in inventory is the big story.”

- Twitter announces it’s banning in-stream advertising from third-party developers, which “are not necessarily looking to preserve the unique user Twitter has created,” COO Dick Costolo writes on Twitter’s corporate blog. “We believe it is our responsibility to encourage creative product development and to curb practices that compromise innovation.”

- What are the implications of Twitter’s move to ban third-party ad networks? “Twitter has now reduced the number of companies trying to figure out their optimal business model from thousands to 1,” angel investor Chris Dixon says in a tweet.

- Intel (INTC) introduces a series of low voltage chips that could make the price for ultra-thin laptops more attractive and affordable, Digital Daily blogger John Paczkowski says, which “bodes well for the ultra-thin laptop which hasn’t had much success staking out a middle ground between the netbook and the laptop because its performance often doesn’t justify its price.”

- Some excellent explanations of the Lost finale.

Get back in there and keep blowing!

Sell, Mortimer, sell!

Friday showed you what can happen when something from left field slams into a market like this one, a market that has been blissfully unaware of the fact that there is such a thing in as risk. When you’ve got a stock market that’s up 75% in a year and seemingly rising every day, when everybody from the White House to CNBC to the Times to Newsweek is proclaiming it’s a bright new day, it’s easy to lose sight of the risks. But they don’t go away just because the bulls want to make some money.

Risk has a funny way of rising up and smacking you down if you don’t pay it respect it.

The aftershocks of the credit crisis are still being felt, still working through the markets. It couldn’t be any other way. But the Street forgot about all that, so enamoured were they with their profit-making ways. They conveniently overlooked the little things that helped them out, like 0% interest rates, or the suspended mark-to-market rules, and thought they were doing it the old-fashioned way (and given what the SEC alleges, we’re not exactly sure what constitutes the old-fashioned way anymore.)

We have not had even a 10% correction throughout this entire rally, but one is coming. If the market’s lucky, it gets off with a 10-15% correction. If it’s not, well, it’ll be worse. Before Friday, I would’ve bet on May for a selloff, for reasons beyond the old “sell in May” trope. Now, it could come earlier. And the Goldman case isn’t the only thing lurking out there.

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- Economic fears prompt risk takers to take day off. “With investors and traders suddenly looking for shelter, the old standby – the dollar – is the day’s big winner,” Tom Petruno says.

- “News that is good (but not great) is sold in an overbought market while news that is bad (but not horrible) is bought in an oversold tape,” Minyanville’s Todd Harrison notes. It’s the reaction that counts.

- Apple (AAPL) speculation is running rampant ahead of its special event. The much-hyped tablet is expected to be unveiled, but could Apple announce a new phone compatible on Verizon Wireless?

- While we’re talking about Apple speculation, don’t expect a deal between Time Warner’s (TWX) Time Inc and Apple by next week when Apple’s expected to launch the tablet, MediaMemo blogger Peter Kafka says. But Time still remains “intensely interested” in the device.

- Scott Brown’s Senate victory in Massachusetts should be viewed as another indicator of increasing outrage over the state of the economy, the Pragmatic Capitalist says.

- Inflation fears aren’t warranted in the short-term. “But what we need is a convincing commitment from the government to both near-term stimulus and longer-term fiscal responsibility in order to be assured that it’s not a concern over the next decade,” James Hamilton says. “And that’s not what I’m seeing from the US Congress.”

- Sirius XM (SIRI) looks to be heading in the right direction. Between positive free cash flow for 2009 and a higher-than expected subscriber count in 4Q, “the winter holidays were particularly kind to Sirius,” John Paczkowski says.

- Stocks return to normalcy after the Massachusetts election rally. “It’s back to economic reality and an earnings season that is mediocre so far relative to expectations,” writes Miller Tabak equity strategist Peter Boockvar.

- Obama slows the health bill, telling lawmakers not to attempt to pass it until Massachusett’s new GOP senator takes office.

- BofA and Wells Fargo posted improved 4Q results, joining some of their other banking peers that have also performed better a year after the depths of the financial crisis.

- Oracle of Omaha isn’t a fan of Obama’s bank tax. ““I don’t see any reason why they should be paying a special tax,” said Warren Buffett. Supporters of the plan to tax the banks “are trying to punish people,” he said. “I don’t see the rationale for it.”

US stocks getting into a seesaw habit, falling today after rising yesterday after falling Friday, and while that’s certainly good for traders’ commissions, it’s far less positive for the equities market.

DJIA loses 122 (1.1%) to 10603, after falling as much as 208 early; S&P 500 drops 12 (1.1%) to 1138, Nasdaq Comp drops 29 (1.3%) to 2291. China’s move to rein in bank lending, Greece’s scramble to merely fund its budget put a kink in the risk trade. That drives up the dollar and Treasurys, and down stocks, crude, gold and the euro.

BofA, Wells Fargo, Morgan Stanley all post earnings that are better than a year ago, but earnings take a back seat to the macro picture today. The only real question for the banks is this: some of the banks, like Citi, BofA and Wells, seem to be anticipating that the worst is over. Others, notably JPMorgan and Jamie Dimon, don’t seem so sure.

“There’s been some nonchalance about the enormity of the run we’ve had from the March lows and the headwinds that we face moving ahead,” said strategist Peter Boockvar, of Miller Tabak in New York. “Now the news out of China today has jolted people out of that mentality a bit.”

How long that jolt lasts, and how deep it is, remains an open question.

Risk is reaching extreme levels

Dow’s inching toward 10000 and everyone’s convinced it’ll cross that psychological level sooner rather than later.

The bullish sentiment in the market is pretty remarkable, but at the same time, very scary. These panic levels, albeit a different kind of panic, are eerily similar to late February and early March, when panic selling brought the market to multi-year lows. Just like six months ago when it seemed like stocks would never rise again, there’s a similar sense now that nothing can push stocks down.

Of course that dangerous thinking usually marks the sign of a top or bottom. And right now, with bullish sentiment reaching scary highs and economic fundamentals still relatively weak, many market observers are questioning how much higher the market can go in the short term.

“There is a near panic ‘have to get in’ attitude among retail investors,” says Mike “Mish” Shedlock, an investment advisor for SitkaPacfic Capital Management. And while retail investors and fund managers are chasing the rally, corporate insiders keep selling their shares – usually not a good sign.

“Risk is not high, it is extreme,” he adds.

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Everything safe and secure, and it's on to lunch.

There’s only two asset classes now, risky assets and non-risky assets, market strategist Ed Yardeni of Yardeni Associates says in his daily commentary, relating the story of a meeting he had with a portfolio manager in London, who worried about a new speculative bubble.

Most of the clients he met with on his swing through Londontown are more bullish than bearish, he says, and the main concern is that there are too many bulls.

This one manager, Yardeni relates, while also seeing more upside, is convinced the flood of liquidity from central banks is reflating commodity and stock prices (a thought that’s crossed our mind once or twice, or daily.)

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